Bernhard Manzke

Fiscal Sustainability and Policy Implications for the Euro Area

In this paper we examine the sustainability of euro area public finances against the backdrop of population ageing. We critically assess the widely used projections of the Working Group on Ageing Populations (AWG) of the EUs Economic Policy Committee and argue that ageing costs may be higher than projected in the AWG reference scenario. Taking into account adjusted headline estimates for ageing costs, largely based upon the sensitivity analysis carried out by the AWG, we consider alternative indicators to quantify sustainability gaps for euro area countries. With respect to the policy implications, we assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon the lifetime contribution to the governments primary balance of different generations suggests that an important degree of pre-funding of the ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate way to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised stability and growth pact would ideally need to be revised upwards to significant surpluses.

Fiscal sustainability and policy implications: a post-crisis analysis for the euro area

In this paper, we examine the sustainability of euro area public finances against the backdrop of population ageing after the 2008–2009 recession. We argue that ageing costs may be higher than projected by the Working Group on Ageing Populations (AWG) of the EUs Economic Policy Committee, consider alternative indicators to quantify sustainability gaps for euro area countries and assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon lifetime contributions to the governments primary balance of different generations suggests that an important pre-funding of ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate manner to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised Stability and Growth Pact would ideally need to be revised upwards to obtain significant surpluses.

The Welfare Effects of Inflation: A Cost-Benefit Perspective

This paper reviews theory and evidence of the welfare effects of inflation from a costbenefit perspective. Basic models and selected empirical results are discussed. Historically, in assessing the welfare effects of inflation, the distortion of money demand played a prominent role. More recently, interactions of inflation and taxation came into focus. Growth effects of inflation as well as welfare effects of unanticipated inflation and of inflation uncertainty are also addressed. To assess the policy question whether inflation should be reduced or eliminated, the costs of disinflation play a role. Finally, the trade-off between the benefits of reducing inflation and the costs of disinflation is discussed and an overall assessment of the net welfare effects of achieving price stability is provided.

The Reaction of Fiscal Policy to the Crisis in Italy and Germany: Are they really polar Cases in the European Context?

The deep recession which hit the world economy towards the end of 2008 induced massive, internationally-coordinated policy responses, both monetary and fiscal. In this paper we examine public finance developments in Germany and Italy in 2009. We find that the larger stimulus measures adopted in Germany mostly compensated a more favorable underlying trend; overall, the cyclically-adjusted primary balances worsened by a similar extent in the two countries. We further estimate the automatic stabilisers to have had an impact on the deficit of similar magnitude in Germany and Italy. We then assess, on the basis of counterfactual simulations, to which extent discretionary measures and automatic stabilizers were able to mitigate the downturn in the two countries. Our results show that the public sector contrasted the fall in real GDP in 2009 by more than 2 percentage points in Germany and by 1 per cent in Italy. The difference in the stabilizing effect of the two public sectors reflects not only the different size of the stimulus measures, but also the higher fiscal multipliers associated with Germany.

Fiskalische Regeln in der Europäischen Währungsunion

Bei der Vorbereitung der Wahrungsunion waren die angemessenen Regeln fur die Finanzpolitik eines der am intensivsten diskutierten Themen. Dabei reichte das Meinungsspektrum bezuglich der Notwendigkeit von fiskalischen Regeln von „schadlich“ uber „uberflussig“ bis zu „unbedingt erforderlich“. Das Grundgerust des Rahmens fur die Finanzpolitik in der Wahrungsunion ist schon im 1992 verabschiedeten Vertrag von Maastricht enthalten. Diese Regelungen wurden 1997 durch den Stabilitats-und Wachstumspakt erganzt und prazisiert. Wahrend die wissenschaftliche Diskussion uber die angemessene Rolle der Finanzpolitik in der Wahrungsunion vorubergehend etwas abgeflaut war, wird zumindest auf politischer Ebene gegenwartig von verschiedenen Seiten laut uber eine Anderung der fiskalischen Regeln in der Wahrungsunion nachgedacht. Aus dieser Diskussion wird deutlich, dass die teilweise recht komplexen Regelungen nicht immer voll verstanden werden. Es scheint daher angebracht, die Regeln fur die Finanzpolitik in der Wahrungsunion nochmals zu erlautern, zu begrunden und im Licht der ersten praktischen Erfahrungen zu uberprufen. Im zweiten Abschnitt wird zunachst die Notwendigkeit finanzpolitischer Regeln in der Wahrungsunion diskutiert. Im dritten und vierten Abschnitt werden die im Vertrag von Maastricht und im Stabilitats-und Wachstumspakt niedergelegten Regeln dargestellt, ehe im funften Abschnitt verschiedene Kritikpunkte an diesem Regelwerk auf ihre Stichhaltigkeit untersucht werden. Auf die bisherigen Erfahrungen mit dem gegenwartigen institutionellen Rahmen wird im sechsten Kapitel kurz eingegangen.

Generational Accounting: Some Remarks on an Application to Germany

The paper by Bernhard Manzke examines an application of generational accounting to Germany. The paper highlights the limitations of this approach. In particular, dynamic economic feedbacks are ignored; the base year budgetary situation is projected to the future without considering that it may be affected by special factors; reforms which have been introduced but have not produced effects in the base year are ignored. The paper also stresses that generational accounts cannot be considered forecasts of the most likely future developments, rather they are indicators of the need for adjustment. Manzke argues that a gradual and limited increase in the lifetime tax rate for future generations could be considered acceptable from a distributive point of view having in mind the increase in their incomes. However, the large tax increase projected for Germany implies that future income increases would be significantly eroded by taxation. Moreover, the changes in behaviour induced by the greater tax burden would negatively affect economic growth. The paper shows that the intergenerational imbalance in Germany is determined by population ageing. Under a constant age structure assumption, the imbalance would disappear. Estimates taking the expected increases in the contribution rate to the pension system into account point to a lower generational imbalance. Present generations would carry a part of the burden of the adjustment.

Die intergenerativen Verteilungswirkungen der öffentlichen Finanzen

Den Ausgangspunkt fur diesen Beitrag bildet die inzwischen auch in der Offentlichkeit verbreitete Einsicht, das die zukunftige demographische Entwicklung erhebliche zusatzliche Belastungen fur die offentlichen Haushalte impliziert und zu einer deutlichen Belastung zukunftiger Generationen fuhrt. Der Altenquotient in Deutschland wird sich nach den Prognosen verschiedener Institutionen bis zum Jahr 2030 ungefahr verdoppeln. Zuruckzufuhren ist diese Entwicklung zum einen auf eine Geburtenhaufigkeit, die deutlich unter dem Niveau liegt, das zur Erhaltung der gegenwartigen Bevolkerungszahl notwendig ware. Zum anderen spielt aber auch die steigende Lebenserwartung eine Rolle. Beide Effekte haben zur Folge, das der Anteil der alteren Jahrgange an der Gesamtbevolkerung zunimmt.